How Can I Use Gift Funds for My Down Payment?
Many home buyers utilize gift funds for their down payment on a new home, keep in mind that the source of the gift is an important factor when going through mortgage financing. There are some things to be mindful of in the process to ensure as a buyer you receive the funds in such a way to satisfy lender guidelines.
Whether your mom has a secret mattress stash of money she’s been saving for your first home, or if you made a special request to your wedding guests to forego the toasters and instead give money toward your new love nest, gift funds can be a big help when it comes to buying a home. Although utilizing gift funds for a down payment on a new home is very common, many don’t realize that the source of the gift is an important factor when going through mortgage financing. There are some things to be mindful of in the process to ensure as a buyer you receive the funds in such a way to satisfy lender guidelines.
The scrutiny by lenders around gift funds is to ensure you are not “borrowing” funds which could, in turn, add to your indebtedness.
Although cash gifts are most often seen given to first-time home buyers, other buyers ‘moving up’ will occasionally use them as well. The extra cash may be desired to help reach a 20% down threshold which could translate to better interest rates as well as no private mortgage insurance (PMI) which has become quite costly in recent years.
When a borrower qualifies through Fannie Mae guidelines for a conventional loan and has FNMA Desktop Underwriter (DU) approval, often the entire down payment can come from gift funds from family. In the past FNMA has required a borrower to have at least 5% of their own funds into the transaction. FHA loans also allow for all of the minimum down payment of 3.5% to be gift; however, there are some additional guidelines around exactly who can give the gift.
It’s important to know how to structure your gift funds to be sure that you are able to meet lender guidelines.
For instance, a gift letter will be a part of the required documentation requested by your lender. The letter should ultimately be short and simple. Typically, the lender will ask that a borrower include the following information:
- Address of property to be purchased
- Amount of gift
- Relationship of the gifter and giftee (should be a relative)
- Declaration that this is a gift and does not need to be repaid
Outside of the basic gift letter there are a few other things to keep in mind:
- Make copies of the front and back of each check. Your lender will need it.
- Deposit your gift check in an actual brick & mortar bank versus via a smartphone. This process may seem archaic to some, but it helps with the paper trail.
- Keep a copy of the deposit slip. You may be asked to provide it for the underwriter.
- The gifted check should go into the same account you are using for your closing. The last thing you need is to have to run around and provide new bank statements right before closing.
- If the gifter is shifting funds around in order to give the gift, ask them to make sure there is a clear paper trail. It may need to be verified.
When you know in advance that you will be using gift funds to help with your down payment, be prepared to document it for your mortgage company.
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